2019 half year results presentation · 2019-07-31 · 1 On a CER basis (2018 restated at 2019...

2019 half year results presentation

Thursday 1 August 2019

© Coats Group plc | 2019 half year results presentation | 1 August 2019 Page 2

Disclaimer

Restricted distribution

This presentation is not for release, publication or distribution, in whole or in part, directly or indirectly, in, into or from any jurisdiction where to do so would constitute a

violation of the relevant laws or regulations of such jurisdiction (the ‘Restricted Jurisdictions’).

Not an offer

This presentation is not intended to and does not constitute, or form part of, any offer to sell or subscribe for or an invitation to purchase or subscribe for any securities or

the solicitation of any vote or approval in any jurisdiction pursuant to the matters contained herein or otherwise.

Forward-looking statements

This document contains certain forward-looking statements, including statements regarding Coats Group plc’s plans (‘Coats’ or the ‘Company’), objectives and expected

performance. Such statements relate to events and depend on circumstances that will occur in the future and are subject to risks, uncertainties and assumptions. There

are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements,

including, among others the enactment of legislation or regulation that may impose costs or restrict activities; the re-negotiation of contracts of licences; fluctuations in

demand and pricing in the industry; fluctuations in exchange controls; changes in government policy and taxations; industrial disputes; and war and terrorism. These

forward-looking statements speak only as at the date of this document.

Not a profit forecast

The financial information contained in this presentation is based on publicly available historic financial information of Coats and is not intended to be a profit forecast or

profit estimate under applicable rules.

Rounding

Due to rounding, numbers presented throughout this document may not add up precisely to the totals provided and percentages may not precisely reflect the absolute

figures.

Agenda

2019 half year results presentation

Introduction and highlights

Business review

Financial performance

Outlook and summary


Introduction: good H1 performance and continued delivery of strategy

Portfolio

rationalised

Connecting

for Growth

programme

largely

complete

Turkey and

China

Innovation

Hubs open

Sustainability

report

released

Strong growth

from

acquisitions


Financial highlights: growth in all operational metrics

• Revenue growth of 2%; key strategic focus areas performing well

• Operating profit growth of 8%; continued margin expansion (80bps)

due to self help initiatives

• 4% growth in EPS; excluding non-operational one-offs

• Continued strong cash generation; up 24%

• Balance sheet well placed for organic and inorganic opportunities

(leverage 0.9x)

• 10% dividend growth reflects ongoing confidence in our future

strategy

Business review

Rajiv Sharma


Our new reporting segments: an overview

Apparel,

Footwear and

Accessories

5 different

end-use

categories *

End-markets

Global market

leader in A&F

thread; >20%

share

Building strong

market

positions

organically and

inorganically

Market

position

30,000

customers

c.40 factories

c.2m orders pa

8,500 customers

10 factories (most

shared with A&F),

c.140k orders pa

Scale

Speed

Personalisation

Innovation

Cost

Quality

Responsibility

Sustainability

Innovative

customer

solutions

Globalisation

Specialisation

Value

propositionGrowth

prospects

Low single

digits market

growth over

medium term –

Coats

outperforming

Faster market

growth

Exciting new

market potential

(eg composites)

* Telecoms and Energy, Personal Protection, Transportation (incl. automotive), Household and Recreation, and Other Industrial Applications

Apparel and

Footwear

Performance

Materials


Apparel and Footwear: resilient growth despite mixed retailer sentiment

1% revenue growth; 2% on like-for-like basis

excluding portfolio rationalisation actions

3% A&F thread growth; ongoing exceptional

service

Continued fashion trends impacting zips

17% organic growth in software revenues

Twine Solutions digital thread printer

launched in June

Corporate, Social and Responsibility

credentials become an increasing Coats’

differentiator

Recycled product launches (cotton and

PFC-free)


Performance Materials: our five new end-use categories

c.20%*

c.30%

c.15%

c.15%

c.20%

H1 2019

revenues:

$165m

Updated reporting categories reflecting market dynamics and strategic focus

Telecoms and Energy: fast growing market (fibre optic

connectivity trend) - protective layers for cables / steel

replacement composites

Personal Protection: combining comfort and protection

- fire retardant and cut resistant threads and yarns

Transportation: high performance threads and

composites for various parts of automotive industry

Household and Recreation: everyday consumer

applications, including bedding / quilting / tea bags

Other Industrial Applications: various other technical

applications for light / strong / flexible / innovative

threads

Telecoms

and Energy Household and

Recreation

Other

Industrial

Applications

Transportation

Personal

Protection

* Proportion of HY revenues


Performance Materials: continued growth

4% revenue growth to $165m

Gotex and Patrick Yarn acquisitions performing

well

Telecoms and Energy (up 27%), and Personal

Protection (up 8%) growing strongly

Transportation revenues broadly flat;

slowdown in global automotive production

Household and Recreation, and Other

Industrial Applications saw declines; US

consumer durables remains relatively soft

Innovation Hubs starting to generate new sales


Connecting for Growth: reinvestments stepping up to drive future growth

Innovation

• 3 Innovation Hubs

established: A&F and PM

• Driving incremental new

product sales

• Creating immediate

customer samples

Digital

• Factory of the future: delivering

real-time manufacturing data

via 150,000 new digital

connections

• Data lake – 15TB of data

driving insights

Talent

• 100+ new roles created

• 200+ received new training

in business partnering /

change management /

sales

Actions now largely complete and programme set to close this year

Cost of programme $30m 2019 FY net savings c.$25m Significant $ reinvestments


ESG: significant progress to date and ambitious future targets

Progress to date

28% renewable energy / 20% water recycled

or re-used

New effluent treatment plant in Mexico in

2019

Dedicated ESG Investor Event in June

(London)

Future activities

Ambitious 2022 targets formed

Construction underway on 3 further effluent

treatment plants

Journey to Zero H&S programme

Financial performance

Simon Boddie


Revenue 705 (3)% 2%

Operating profit 2 102 3% 8%

Operating margin % 14.5% 80bps 80bps

EPS (cents) 2 3.4 (4)%

Free cash flow 3 21 24%

ROCE 40% 200 bps

Interim Dividend per share (cents) 0.55c 10%

Organic 1H1 2019Reported

change$m unless otherwise stated

Overview

1 On a CER basis (2018 restated at 2019 rates), and excludes contribution from acquisitions made during the period

2 Excludes exceptional and acquisition related items, reported / CER includes contribution from bolt-on acquisitions; 4% EPS growth

excluding MTM FX, IFRS16 and legacy interest charges

3 Adjusted for UK pension recovery payments, acquisitions and exceptional items

KPI


Revenue

Asia: 3% growth - good performance in key A&F markets

Americas: 6% decline - difficult trading conditions in Latin

America A&F and US consumer durables

EMEA: 7% growth - driven by Performance Materials

(Telecoms and Energy) and consistent A&F

Operating profit

Operating profit up 8%: self help initiatives (price,

productivity, procurement cost control and C4G) despite

input cost inflation

Operating review

1 On a CER basis (2018 figures restated at 2019 exchange rates)

and excluding contributions from bolt-on acquisitions

2 Includes contributions from bolt-on acquisitions made in the year

3 On an adjusted basis which excludes exceptional and acquisition related items

4 Restated for NA Crafts and IFRS15

$m H1 2019 H1 2018 4 Organic

1

change %

Asia 395 383 3%

Americas 167 177 (6)%

EMEA 142 133 7%

Total 2 705 692 2%

Operating profit 2,3 102 95 8%

Operating margin 14.5% 13.7% 80bps


Segmental overview

Revenue and operating profit growth across

both segments

Apparel and footwear profit up 9%; slightly

ahead of the overall Group

Performance Materials profit up 4% to $23m;

margins flat at 13.7% a result of specific

impacts:

– Bad debt / inventory write downs $1m

– Innovation Hub costs

2018 FY margins: A&F 13.7%, PM 14.1% PM (Group 13.8%)

H1 2019 H1 2018 1 Organic

4

change %

Revenue 2 ($m)

Apparel and footwear 539 533 1%

Performance materials 165 159 4%

Total 705 692 2%

Operating profit ($m)2,3

Apparel and footwear 79 73 9%

Performance materials 23 22 4%

Group 102 95 8%

Operating margin (%)

Apparel and footwear 14.7% 13.7% 110bps

Performance materials 13.7% 13.7% 0bps

Group 14.5% 13.7% 80bps1 2018 figures restated at 2019 exchange rates

2 Includes contributions from bolt-on acquisitions made in the year

3 On an adjusted basis which excludes exceptional and acquisition related items

4 On a CER basis excluding contributions from bolt-on acquisitions


Income Statement

• Exceptional / acquisition related items: significantly

reduced year-on-year due to the reduction in C4G

reorganisation spend ($1m; H1 2018: $17m) and a

historic legacy tax credit in Brazil ($3m)

• Finance costs: higher in the period primarily due to:

• Mark to market FX $2.4m (2018: $0.4m)

• IFRS16 accounting standard adoption $1.8m

• Legacy interest impacts $1.7m

• Underlying tax rate: further reduction to 30% (2018:

31%)

• Discontinued operations: NA Crafts (Feb

completion)

• Minority interests: predominantly operations in

Vietnam and Bangladesh

• Adjusted EPS: down 4% (up 4% excluding IFRS16,

MTM FX and legacy interest impacts)

• Interim dividend per share: 10% growth to 0.55c

All data shown on a reported basis, i.e. 2018 not CER basis. 2018 restated for NA Crafts.

$mH1 2019

reported

H1 2018

reported

Adjusted operating profit 102 99

Exceptional / acquisition related items (1) (20)

Operating profit 101 80

Share of profit from JVs 1 (0)

Finance costs (16) (11)

PBT 85 69

Tax (26) (26)

Profit after tax 60 43

Discontinued operations (3) 1

Profit for the period 57 44

Minority interest (10) (10)

Attributable profit / (loss) 46 34

Adjusted EPS (cents) 3.4 3.5

EPS (cents) 3.4 2.3

DPS (cents) - interim 0.55 0.50


Cash flow and leverage

$21m adj. free cash flow in H1; 24% Y-O-Y growth driven

by operating profit growth and controlled NWC

Lower cash flows in H1 reflect normal working capital flows

On a LTM basis, adj. free cash flow of $100m (2018: $96m)

Net debt (excl. IFRS16) reduced to $210m; leverage 0.9x

(Dec 2018: 1.0x)

One-time impact of adoption of IFRS 16 increases net debt

by $58m to $269m (and associated uplift to EBITDA)

H1 2018 118 (42) (21) (8) (26) (6) 2 17 EBITDA does not add-back for increased depreciation for

right of use assets under IFRS 16 ($7m)

$m H1 2019 FY 2018

Adj free cash flow 21 96

Pensions (12) (24)

Discontinued 30 7

Acquisitions (4) (7)

Dividends paid to equity shareholders (16) (21)

Exceptionals and other (7) (27)

FCF 12 25

FX and other movements - (6)

Change in net debt 12 19

Group net debt (excl. IFRS 16) 210 223

Adoption of IFRS 16 58 -

Group net debt (incl. IFRS 16) 269 223

Leverage (excl. IFRS 16) 0.9x 1.0x

Leverage (incl. IFRS 16) 1.1x n/a


Robust financial delivery

Operating

margin

expansion

Organic

sales

growth

Growing

cash flows

Minimal

exceptional

items

Strong

Balance

Sheet

Outlook and summary

Rajiv Sharma


Outlook

In the second half of the year we will continue to drive performance through

our focus on customer service and building on our innovation and digital

capabilities, supported by our self-help initiatives.

Our full year earnings per share will be impacted by the highlighted foreign

exchange movements, IFRS16 changes and certain legacy interest charges.

However, whilst we remain mindful of current macroeconomic uncertainties, we

anticipate delivering 2019 full year adjusted operating profit in line with our

expectations.


Summary: delivering our strategy

Delivering

self-help initiatives eg C4G, Innovation,

Simplification, Digital

Delivering

strong

profitability

and free

cash flow

Global leader

in Apparel &

FootwearValue-add

acquisitions

Performance

Materials

Continued share

gains

Accelerated

sales growth

Appendices


Financial guidance

Area Guidance

Capital expenditure • $45-55m in 2019

Connecting for Growth programme • $25m net benefits in 2019, after reinvestments (innovation, digital, people)

• $30m total reorg. costs (excluded from adjusted operating profit); $24m incurred to date, with remainder

expected in 2019

• Programme scheduled to close this year

UK pension deficit recovery

payments, and admin costs

• $30m p.a. (£24m) deficit recovery payments, including administrative costs and levies, from April 2019

onwards until 2028 (at latest FX). Next triennial review effective date 31 March 2021.

• $28m (£22m) deficit recovery payments, including administrative costs and levies in 2019 (including Q1

at previous triennial agreed rates).

• UK scheme admin costs – c.$1m annualised savings following UK scheme consolidation once fully

realised

Pension finance charge • 2019 pension finance charge $5-6m (based on closing IAS19 position, and impact of NA Crafts

disposal) (2018: $3.8m)

Underlying effective tax rate • 30% for FY2019

• 2019 effective cash tax rate > P/L effective rate (timing)

Shareholder dividends • Progressive growth reflecting earnings and cash growth

Leverage • Maintain a strong Balance Sheet with a target leverage (net debt / EBITDA, pre. IFRS 16) of 1-2x

IFRS 16 leases • See next slide


Income statement

$mH1 2019 FY 2018

Eliminated operating lease charge 8.1 -

Increased depreciation charge - right-of-use assets * (7.1) -

Net impact to operating profit * 1.0 -

Increased interest charge - on associated new lease liability (1.8) -

Net impact to Profit Before Tax (0.8) -

Net impact to Profit After Tax (0.5) -

IFRS16 – leases

Balance Sheet

$m

30 Jun

2019

31 Dec

2018

Increase in right-of use-assets 58.5 -

Increase in lease liabilities (57.7) -

Decrease in PPE (0.2) -

Decrease in provisions 1.3 -

Decrease in prepayments (1.9) -

Accounting policy change effective for periods

beginning on or after 1 Jan 2019

Modified retrospective approach applied to

restatement – no impact on prior years as a result

Primary impact for Coats is requirement to replace

previously termed operating leases with new “right-

of-use” asset and associated liability

Net increase to operating profit of $1m in the period;

$2m increase to finance costs (interest charge on

new lease liabilities)

FY impact expect to be broadly pro-rata to the HY

actual impact

No impact on adjusted FCF or Balance Sheet

leverage calculation for covenant purposes

Leverage including lease liabilities and higher

EBITDA of 1.1x at June 19 (0.9x excluding IFRS16)

* Total increase to EBITDA = $8.1m


Group 2018

Sales $1.4bn

Operating profit $195m

Adj EPS growth 21%

Adj free cash flow $96m

ROCE 43%

High technology threads

and yarns from

performance materials

Apparel, footwear and

accessories thread

Zips and trims products

Software solutions

World’s leading industrial thread manufacturer

Apparel and

Footwear (A&F)

Performance

Materials

Global footprint

- 18,000 employees

- Some 50 sites

- Sales in 100+ countries

- Global distribution network

- UK headquartered, COA:LSE

- FTSE 250 member

Customers includeCustomers include

2018

Sales


Corporate timeline: a rich heritage

Coats is a company with more than 250 years of history

1750s

Coats Group plc returns to

London stock market 125

years after initial listing

2015

1912One of the world’s largest

companies by market

capitalisation

James and Patrick Clark

began work in Paisley, Scotland

1812Clark’s sewing thread

placed on the market

1890Coats’ initial share offering takes

place on London Stock Exchange

James Coats establishes first

Ferguslie mill in Paisley

1826

2004

GPG acquisition

completed and

company de-listed

1980s-1990sPeriod of manufacturing decline:

Acquired by Vantona Viyella.

M&A with Tootal, Barbour, and DMC

1896Coats and Clark family

business merger forms:

J. & P. Coats, Ltd

1900s

machinery1960s manufacturing

J&P Coats

Sewing Cotton

London Stock Exchange 1891

2011-13

GPG asset

realisation

programme –

leaving Coats as

sole remaining

operating

business

2013-14

Pensions regulator

Warning Notices received

on UK Pension schemes

2016-17

Settlements with 3 UK

pensions schemes

achieved and regulatory

action ceased

First dividend as Coats

Group plc paid

2016

De-listing from

AZX and NZX

solely LSE

listed

2017

Coats enters

the FTSE 250

on 19 June

2019

Sale of North

America

Crafts


Apparel and Footwear: A global leader - winning with the winners

$1bn sales

with 4%

CAGR*

Consistent

share gains in

thread

Unrivalled

customer

connections

Compelling,

value adding

products and

services

Operational

scale with

global

reach

(threads, engineered

yarns, zips, trims,

software solutions)

4,000 brands

30,000 direct customers

* 2014 – 17 organic CER CAGR


Understanding the thread market landscape

Size and structure

Consistent but moderate market

growth

A critical component in a

global, agile industry

Segmentation

Economy to premium

20%*

End use

$$$

Open spec Specified

Rich product variety

10-12

regional+

‘000s

local players

13%*

Market value*

$4.2bnSpecification

* Coats’ estimates – as per 2018 Capital

Markets Day presentation

# 2 and 3

players


Software solutions – a clear opportunity to add value for our partners

Market opportunity Case study

Significant value chain wasteUp to 25% of $400bn factory gate prices

Highly transactional20 million+ orders from Brands/Retailers on

manufacturers

Fast-changing 15%+ growth in styles every year

Increasing SpeedDesign to shelf lead times crashing

6 months to 30 days

Industry standard for

bill of labour for

transparent costing

Market leader in

production planning

(key to service delivery

and optimum utilisation)

Apparel product

lifecycle management

Our solutions

Bodynits achieved faster and more

realistic planning process resulting in

+20% efficiency gain after

implementing Fast React's Evolve

Planning time reduced from

5 days to 1 day


Pioneering a sustainable future: committed to leadership, building on excellent

progress to date

40% Reduction in

litres/kg thread

2018 20% water recycled /

reused

28% renewable

energy

Achieved zero liquid

discharge at largest

plant

91% of sites above

industry benchmark

for H&S culture

New waste

management

system

* Zero Discharge Hazardous Chemicals effluent standards

Managing a preciousresource wisely

WATER

Renewables for asustainable future

ENERGY

Working for a cleaner world

EFFLUENT &EMISSIONS

Safe and sustainableworkplaces and

communities

SOCIAL

Protecting our planet

LIVING SUSTAINABLY

7% Reduction in

kwh/kg threadZDHC*alignment

Great place to work accredited

25% Waste reduction

5 key priorities, with clear and ambitious 2022 targets, to drive accelerated progress

By

2022


Materials: raw materials (polyester, nylon,

cotton) and intermediates (grey thread);

direct materials (dyes, cones) and bought-in

finished goods (craft products)

Labour (mfg): ongoing inflationary pressures

in the locations in which we operate

Energy: sourced from local and national

grids, price linked to regional supply /

demand dynamics

Other includes maintenance, insurance and

water

Distribution includes freight and warehousing

Administrative includes corporate costs

Cost base

Full year 2018 - pre-exceptional costs

~$1.2bn

Continuing operations


Dividend and capital allocation

The Group aims to use the free cash flow it

generates to balance its various capital demands

Whilst maintaining its strong Balance Sheet

position (target leverage 1-2x)

We have adopted a progressive dividend policy

where we aim to grow dividends along with

underlying earnings and cash

The Board has declared an interim dividend for

2019 of 0.55c per share – a 10% growth on 2018

The full year 2018 dividend reflects earnings

cover of 4.1x and cash cover (post recurring

pension recovery payments) of 3.4x


For more information

Rob Mann

Head of Investor Relations

+44 20 8210 5175

[email protected]

Coats Group plc

www.coats.com

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2019 half year results presentation · 2019-07-31 · 1 On a CER basis (2018 restated at 2019...

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